What type of fiscal policy would likely increase consumer spending?

The selection of tax cuts as the answer is grounded in the relationship between disposable income and consumer spending. When taxes are reduced, households have more disposable income at their disposal. This additional income allows consumers to either save more or increase their spending on goods and services.

Increased consumer spending stimulates demand within the economy, which can lead to higher production and possibly job creation as businesses respond to the uptick in demand. This mechanism is a fundamental aspect of expansionary fiscal policy, which aims to boost economic activity.

In contrast, tax increases reduce disposable income, thereby limiting consumer spending. A reduction in government services could also lead to decreased public spending, further contracting economic activity. Increased regulation typically imposes additional costs on businesses, affecting their output and employment levels, which can also lead to a downturn in consumer confidence and spending. Thus, tax cuts effectively create a favorable environment for consumer spending to rise.